Oracle announced a bid this morning to purchase competing middleware provider BEA Systems in an all-cash deal worth nearly $6.7 billion, in what would be the second-largest acquisition in its corporate history. The latest move comes on the heels of rival SAP's $6.8 billion purchase earlier this week of analytics firm Business Objects, signaling an escalation in the acquisition arms race between the two business software powerhouses.
Redwood Shores, Calif.-based Oracle left little doubt about the seriousness of its intentions -- or what the company called the "friendly" nature of its overtures. In a letter delivered to BEA's board of directors on October 9, Oracle offered $17 per share in cash, representing a 25 premium over the middleware provider's Thursday closing price of $13.62. The total offer price of $6.7 billion surpasses Oracle's $6 billion deal for Siebel Systems in 2006 and is second in size only to its $10.3 billion purchase of PeopleSoft in 2005. The deal would be Oracle's largest of 2007, exceeding the $3.3 billion spent acquiring Hyperion Solutions in March 2007.
"We have made a serious proposal including a substantial premium for BEA," said Charles Phillips, Oracle's president, in a statement. "This proposal is the culmination of repeated conversations with BEA's management over the last several years. We look forward to completing a friendly transaction as soon as possible."
The completion of the transaction may not be as quick to complete as Phillips and Oracle would like. In early Friday trading, shares of San Jose, Calif.-based BEA Systems moved well ahead of Oracle's offer price, trading as high as $18.25. Some observers believe this may signify a looming bidding war between Oracle and SAP, not unlike the battle over retail software provider Retek, a fight eventually won by Oracle at a cost significantly higher than its initial bid. (Another factor that may drive the cost of the deal higher: Reuters reports that about 21.6 million shares of the stock were held short at the end of September, or about 5.5 percent of the company's shares outstanding. Unless they've done so already, those sellers will need to purchase shares to cover those sales.)

Ray Wang, principal analyst at Forrester Research, is among those who thinks a battle is in the offing. "Oracle should expect a fight for BEA," he says, in a written note. "Other vendors like SAP, IBM, and HP need BEA more than Oracle does." He notes that SAP's middleware options are most in need of a boost: "SAP's NetWeaver is among the weakest of middleware platforms, despite one of the strongest ecosystems."
Many industry observers believe SAP had made overtures toward BEA in the past. A successful acquisition of BEA would not only add to Oracle's topline revenue and remove a middleware competitor from the playing field, but would also keep BEA out of the hands of SAP and effectively short circuit any efforts by the German giant to make further inroads in the middleware field, a sector often open to divergent definitions. (Using a very narrow definition of the field, IDC recently ranked the market leaders as IBM, BEA, Oracle, and Microsoft.) The deal, Wang says, effectively raises the barrier to entry to an insurmountable height: "Oracle's potential acquisition takes away the last remaining independent major middleware platform provider leaving future competitors without a large install base and a third party player."
There had been much debate in the industry about whether Oracle even needed to purchase BEA, or if Oracle might simply eclipse the often-troubled smaller company. In quarterly conference calls over the years, Oracle executives had repeatedly indicated that Oracle would "soon pass" BEA in middleware new license revenue, but there's no evidence to suggest that that has happened yet. (In fact, Oracle recently stopped breaking out middleware revenue from its database revenue, making such distinctions even more difficult.) But Jason Maynard, an analyst at Credit Suisse, predicted in July that BEA would be sold over the following three to six months, citing the company's "poor execution over the last few years" as well as "anecdotes about customer losses to Oracle and open source alternatives in addition to ongoing issues with field sales personnel." Maynard also predicted at the time that "the most logical buyer is Oracle, given their position, scale, and proven ability to execute. It also doesn't appear other software/hardware vendors either have the desire or ability to execute the transaction."
Now, in the aftermath of Oracle's offer, the match makes clear sense to some. This deal "provides a logical conclusion to the questions surrounding the future of BEA," Stuart Williams, a senior analyst with Technology Business Research, suggests in a written note. [It's] a strong win for Oracle," he writes, and one that "will help Oracle as the company gears up to combat IBM for the leadership position in the middleware market."
Citing Oracle's track record in integrating past acquisitions such as Siebel and PeopleSoft, Phillips also emphasized the smooth transition BEA customers could expect from new ownership. "We intend to protect the investment customers have made in BEA's products by supporting those customers and products for years to come," Phillips' statement continued. "Our continuing support commitment has been amply demonstrated with all of our previous acquisitions, including PeopleSoft and Siebel. BEA will be no different. The acquisition of BEA by Oracle will enable an increase in engineering resources that will in-turn accelerate the development of our world-class suite of middleware. Both Oracle and BEA customers will benefit from this increase in engineering investment as they migrate to modern SOA technologies."
One issue still to be worked out is the extent to which Oracle plans to integrate BEA's technology into its own plans for its Fusion line of applications. Wang notes "recent rumblings about a delay in Fusion apps delivery" and says there has been "speculation [as] to whether or not Fusion Middleware will still be the basis of Fusion apps." If that were the case, the acquisition of BEA's robust middleware technology would provide a much-needed boost, he says. "The BEA platform reaches out to more non-Oracle shops and provides a truly open platform for integration with less lock in at the metadata and process levels."
The proposed deal has been earning praise from several analysts, both for the opportunity to add to Oracle's cash flow, and for the chance to fully unify Oracle's "technology stack." Williams, of Technology Business Research, suggests that "BEA is a technology-focused firm that should find a good home inside Oracle." Williams goes on to write that "Oracle owns the software stack below the BEA middleware (OS and database), around BEA's offerings (the complete Oracle Fusion Middleware suite), and above BEA's offerings (applications). Oracle can integrate the BEA technology directly into the core of the Oracle stack, strengthening it, while at the same time removing a competitor and adding close to $1.4 billion in annual revenue to its coffers."
BEA's management has recently been under pressure from billionaire investor Carl Icahn, often referred to as a "corporate raider," whose ownership position in the company reportedly reached 13.2 percent in early October; Icahn had reportedly been pushing BEA management to put itself up for sale. TheStreet.com's James Cramer predicted in mid-September that Icahn's growing ownership indicated a strong likelihood for a BEA sale, a prediction he reiterated on Monday following SAP's Business Objects announcement. Cramer, though, predicted that SAP itself would make a move for BEA: "This ridiculous acquisition of the just-now blowing up Business Objects, a company that was getting its butt kicked, presages another buy from SAP of BEAS [BEA Systems' stock ticker symbol].... BEAS is cheap, with lots of cash and a burgeoning business in China. Business Objects was a much tougher sell."
Not everyone was as rosy about BEA's prospects. As recently as this week, Banc of America Securities downgraded BEA, saying that its rise had "played out" -- but Banc of America was nevertheless complimentary about BEA management's recent improvement efforts. "Since bottoming out on Aug. 9, BEA shares are up 25 percent versus a gain of 9.5 percent for the Nasdaq, driven by: (1) evidence of more significant cost management; (2) solid fiscal second-quarter results; and (3) growing activist involvement," a sly reference to Icahn.
BEA's value as a standalone vendor may be "played out," but Forrester's Wang notes that, should the deal close, Oracle can expect to gain access to the "high-end clients" BEA is known for. "With a blue-chip base of the best internal IT shops, those in telecom and financial services, Oracle or any acquirer could cement its leadership in middleware over IBM, MSFT, and SAP. These custom development shops represent the best and brightest user base and the most lucrative."
Ray Wang, principal analyst at Forrester Research, says the deal simply "added fuel to fire in the rapidly consolidating enterprise software market." The future, he says, will bring more deals. "With so much liquidity in the market, expect continued and accelerated consolidation along key battle grounds of middleware platforms such as MDM [master data management], BI [business intelligence], Portals, BPM [business process management], and other Information Management tools." As if to underscore the point, in acquisition news unrelated to BEA, Oracle announced earlier this week that it had acquired LogicalApps, a provider of automated Governance, Risk and Compliance (GRC) controls management solutions. Oracle said in a statement at the time that the technology will strengthen Oracle's GRC application suite by integrating real-time policy enforcement for critical business processes.